UK Mortgages 2008
Datamonitor, August 2008, Pages: 115
2007 started brightly with gross lending in the UK mortgage market recording a new peak in the first half. However, the later half of last year was marred by liquidity issues, which have been carried over into 2008. This current year is proving to be a very difficult one for the mortgage sector. What does the future hold for this sector?
Scope
- This report consists of 7 UK mortgage briefings published individually between November 2007 and July 2008.
- Focuses on hot topics in the UK mortgage market such as funding issues and competitor strategies.
- Provides forecasts under three scenarios.
- Accompanying Excel data pack and PowerPoint Executive Summary.
Highlights of this title
Due to the continuous lack of liquidity, lenders continue to rationalize lending, focusing on good quality business. With lesser appetite for riskier lending, lenders have significantly raised the level of deposit required from mortgage customers.
There are but a handful of lenders that offer a green mortgage product. Out of a total of 120 active lenders, only five offer a true green mortgage: a staggeringly small 4% of the market.
With fewer products available on the market and consumer demand remaining strong, the dynamics are changing. Lenders are currently in a position where they can charge higher prices without this affecting demand. In fact, many lenders are seeing an excess of demand for their products despite increasing interest rates on their products.
Key reasons to purchase this title
- Plan your future strategy with confidence using Datamonitors scenario-based forecasts of UK residential mortgage gross advances to 2012.
- Understand the challenges the mortgage industry is facing.
- In-depth analysis of how lenders are coping with a number of issues allowing you to reassess your strategy.
Overview
Catalyst
Summary
The UK Mortgage Market in 2007 and Future Outlook 5
2007 was a story of two halves 5
Gross mortgage lending in H1 2007 reached new peaks 5
H2 2007 was marred by liquidity issues 6
The credit crunch took time to feed through the performance of the UK mortgage market 6
Buy-to-let was the major driver behind the performance of H2 2007 7
2008 is proving to be one of the most challenging years for the UK mortgage market 9
The credit crunch is showing no signs of abating 9
Availability of credit remains tight and mortgage interest rates high 10
Economic growth is forecasted to fall below the 2% mark in 2008 and 2009 10
After years of high price inflation, house prices have started to fall 10
Consumer debt remains an issue 12
Mortgage arrears and repossessions are increasing 13
House purchase approvals have dropped dramatically 14
Gross lending over the first four months of 2008 is already down by 9.8% over the previous period 15
Gross lending in the UK mortgage market will remain subdued over the next few years 15
Under Datamonitors view, gross lending will drop by 19.3% in 2008 to reach £293.5 billion 15
Two additional alternative scenarios are presented below as the UK mortgage market remains one of uncertainty 17
The pessimistic scenario assumes a house price crash 17
The optimistic scenario assumes market confidence returns in H2 2008 18
Competitive Dynamics in the UK Mortgage Market 20
Most top 10 mortgage lenders grew their business over a record 2007 mortgage market 20
Nationwide recorded the biggest growth in gross lending among the top 10 mortgage lenders 20
HBOSs focus shift to profitability rather than volume has seen the lender lose share over the years 21
All top 10 mortgage lenders increased their mortgage balances over 2007 22
Competitive pricing and good retention strategies are behind lenders 2007 success 24
The credit crunch is changing the competitive landscape of the UK mortgage market 24
The number of mortgage lenders operating in the UK market has declined over the space of a year 24
Small building societies continue to dominate in terms of number 25
The liquidity squeeze is leading to higher margins 26
While the major lenders have increased the rates on their two-year fixed rates, SVRs have gone down 27
Lenders who are willing to compete on prices will increase their market share 28
HSBC extended its Rate Matcher service to non-HSBC customers 28
Abbey capitalized on strong funding position and increased its gross lending market share in Q1 2008 29
Nationwide has re-priced its short-term fixed rate mortgages to make them more attractive 29
There will be a number of changes in movements of mortgage lenders market share in 2008 30
Northern Rocks nationalization means that it can not compete on a level footing with other lenders 31
Lenders focus will continue to remain on profitability and retention 31
Gone are the days of mass customer acquisition 31
Retention is the word 32
Funding Issues in the UK Mortgage Market 33
The Northern Rock crisis has brought the issue of mortgage funding to the fore 33
Mortgage funding via the wholesale markets has become more popular in the UK in recent years 33
Securitization in particular has become much more common because of its benefits to lenders 34
The UK mortgage market has become highly sophisticated because of non-retail funding and securitization 35
Starting the troubles, defaults in the US sub-prime mortgage market led to a disruption of credit markets 35
This, in turn, led to a crisis in liquidity, which Northern Rock suffered from 36
Northern Rocks funding model, as well as other lenders, have now come into question 36
Some UK lenders, mainly specialists, are now particularly exposed to liquidity shortages 37
Lenders in the specialist sectors are going to be impacted to a greater degree than diversified banks 37
Difficulties are being played out, particularly in the sub-prime mortgage market 38
All lenders will nonetheless face higher wholesale funding costs and a slower mortgage market 38
Should the wholesale markets continue to be difficult in the long term, many more lenders will suffer 39
Diversified banks may not be exposed on the funding side, but many are on the investment side 39
However, this type of funding will continue being relied upon as it is a strong model 40
Funding by wholesale markets and securitization has worked successfully for many years 40
Loose US lending standards and securitizations opaque nature is more responsible for the current crisis 40
There is no going back to retail-only funding as a large portion of the mortgage market would disappear 41
The market will be repaired, but safeguards should be put into place so that this situation does not re-occur 42
Future Buyer Intentions in the UK Mortgage Market 43
11% of consumers might take out, top up or change their mortgage in the next five years 43
General insurance products were the most mentioned products but mortgages received significant mentions too 43
Consumers falling in higher household income bands are more likely to consider taking out, topping up or changing their mortgage 44
Consumers would most likely consider traditional providers when taking out a mortgage 45
Building societies and banks are by far the preferred types of mortgage providers by consumers when considering taking out a mortgage 46
Consumers are more likely to consider major mortgage lenders when taking out a mortgage 47
Consumers would mostly use face-to-face and the internet to find information about a mortgage 49
67% of participants mentioned they would speak to someone face-to face 49
The internet is also a popular method for seeking out information 49
When taking out a mortgage, more than a third of consumers would choose the internet over face-to-face to find information about the product 50
Consumers would most likely approach IFAs when seeking out information on a mortgage 51
53% of participants mentioned IFAs 51
More than a quarter of consumers would seek advice from their friends, family and colleagues 53
Unsurprisingly, most consumers would use face-to-face when arranging a mortgage 53
76% of consumers will use face-to-face to arrange a mortgage 53
The majority of consumers would never consider digital TV when arranging a mortgage 54
Assessing the Risk of High LTV Mortgages in the UK Market 55
High LTV mortgages have become popular as house prices have grown 55
Datamonitor defines high LTV mortgages as mortgage products with a 90% LTV or above 55
Some specialist mortgages above 85% LTV, however, can also be considered high LTV mortgages 55
First-time buyers and others have been priced out as house prices have risen 55
To cater for customers and remain competitive, lenders began to offer higher LTV mortgages 55
In turn, buyers have been taking up high LTV mortgages 56
There is concern surrounding high LTV mortgages because of the risks they pose 56
High LTV mortgages expose borrowers to a greater extent than traditional mortgages 56
Higher exposure is particularly troubling as the economic climate is becoming more difficult 56
House price growth is now slowing, though 2007 looks still to be a strong year for most regions in the UK 57
Interest rates have risen since the second half of 2006 and caused mortgage rates to rise 57
Arrears and repossessions continue to rise but remain low 57
Unsecured bad debt continues to rise 58
Most importantly, the economic climate looks more uncertain given recent events in the financial world 59
It is not in lenders interests for borrowers to be unable to afford their mortgages 59
The risk for most lenders nevertheless remains low 59
High LTV mortgages remain a very small proportion of the overall mainstream market 59
Major lenders are not particularly exposed to high LTV lending 59
Recent mortgage lending, however, poses more risk 60
Even for mortgages with LTVs of around 80-90% there is still some risk 61
For some specialist sectors, however, high LTV mortgages could be more of a problem 61
Self-certification mortgages are now available at higher LTVs but some customers overstate their incomes 61
While buy-to-let LTVs remain largely under 85%, rental income is not the only factor to affect affordability 62
Lenders operating in the sub-prime prime sector are at greatest risk 63
But lenders are recognizing the risks since the credit crunch and making lending criteria more stringent 63
Mainstream lenders have lowered LTVs and raised prices 64
Lending criteria and products have been cut back particularly in the sub-prime mortgage market 64
Still, lenders should be prepared should a number of scenarios occur 65
A number of scenarios could affect both mortgagors and lenders with high LTV mortgages 65
A significant rise in interest rates would see an increased number of borrowers in payment difficulties 65
A house price crash would throw a significant number of borrowers into negative equity 65
Should an economic downturn occur, borrowers savings would not cover payments for long 66
Lenders should take the right precautions to avoid danger in the future 66
Green Mortgages: Assessing the Feasibility of Success in the UK 67
Increased awareness of environment change has boosted demand for green products 67
Governments across the world are under pressure to reduce their countries impact on the global environment 67
The UK has proposed one of the most ambitious targets to combat climate change 67
Energy efficient housing is one of the key measures that the UK government is hoping will achieve a reduction in emissions 68
Mandatory energy performance certificates are now required for every residential property in the UK, as part of the requirements of a Home Information Pack 68
The UK banking market offers a range of green-friendly products 68
Consumers adopted more ethical banking products from 2006 to 2007, growing the business by 11% 69
Ethical investments are still the largest and most popular green financial instrument 69
While there is a standard definition of a green mortgage, the product takes many different forms 69
Mortgage lenders offer various types of green mortgage 69
The market for green mortgages is still small, despite a slight increase in popularity 70
Most green mortgage providers are small lenders 71
Typically, a lenders green mortgage product will be more expensive than their best mortgage offer, although in some cases discounts are offered 72
While category 1 lenders have enjoyed some growth, category 2 lenders green mortgage books remain steady 72
Green mortgages remain niche internationally 72
Financial services companies abroad are more creative in their approach to offering green mortgage incentives. 73
Green mortgages are likely to remain a niche product 73
The UK mortgage market is driven by price 73
History demonstrates that higher-priced, non-standard mortgage offers do not perform well in the UK market 74
The green proposition is likely to provide a competitive advantage to lenders if a customer has to choose between two similarly priced products 74
There is limited demand for green mortgages 74
The green mortgage product appeals only to a limited segment of the market 75
Green mortgages do not appeal to first-time buyers 76
In the current market, second and third homebuyers are opting for the lowest priced mortgage products 76
Very few lenders offer the product, thus limiting supply and product choices 76
Market uncertainty is shrinking non-standard product portfolios 76
Few mortgage brokers are aware of green mortgages 76
Widespread uptake will require government and institutional commitment 77
Some incentives have been put in place but the market view is that they are not enough 77
Proposed government initiatives to encourage greener living will drive demand for green mortgages 77
Sustained co-operation between lenders and the government is needed to grow the green mortgage market 78
Some European countries have successfully implemented incentive schemes to boost green housing 78
The UK needs to stimulate greater awareness of green building among the general public 78
Consumer education is key 79
Impact of the Credit Crunch on UK Mortgage Product Structures 80
The UK mortgage market has shrunk following the liquidity crisis 80
The lack of funds in the UK money markets has led to drastic changes in the mortgage market 80
Lenders have resorted to using a number of strategies to balance demand with supply 80
A large number of mortgage deals have disappeared off the market 81
Some lenders have suspended new originations 82
Mortgage product structures have changed considerably 83
Sub-prime mortgage products are very limited 83
LTV ratios have decreased significantly across all mortgage products 84
While 100% LTV mortgages still exist in the market, they are only available in restricted regions or with heavy credit guarantees 85
The average maximum LTV has decreased by 8.9% in 12 months 86
Fixed-rate mortgages are currently the most expensive they have been in the last decade 86
Even mainstream lenders best fixed-rate offers are not particularly attractive 88
Lenders will continue to differentiate prices between distribution channels 88
Maximum advances are lower by over £200,000 compared to June 2007 89
The impact of the credit crunch will accelerate through 2008 89
The sub-prime and near-prime markets will continue to be worst hit 90
First time buyers will continue to struggle to find credit 90
Mortgage product innovation that demonstrates a tangible benefit to home buyers will win new market share 91
HSBCs RateMatcher Mortgage offers a competitive remortgage rate to struggling homeowners 92
Lloyds TSBs Airmiles mortgage helps consumers forget their credit problems 92
APPENDIX 93
Supplementary data 93
The UK Mortgage Market in 2007 and Future Outlook 93
Competitive Dynamics in the UK Mortgage Market 97
Funding Issues in the UK Mortgage Market 102
Future Buyer Intentions in the UK Mortgage Market 105
Assessing the Risk of High LTV Mortgages in the UK Market 107
Impact of the Credit Crunch on UK Mortgage Product Structures 108
Definitions 109
Bank of England base rate 109
Buy-to-let 109
CAGR 109
Fixed rate mortgage 109
Gross advances 110
Mortgage intermediary 110
Non-standard and sub-prime 110
Remortgaging 110
Tracker mortgage 110
Variable mortgage 110
Methodology 110
Forecasting methodology 110
Further reading 111
Ask the analyst 111
Disclaimer 111
List of Tables
Table 1: Gross lending by product line for H1 2007 and H2 2007 8
Table 2: A sample of independent house price forecasts for the UK residential property market 12
Table 3: Forecasted gross advances in the UK residential market by product lines under Datamonitors view, 2007-12f 16
Table 4: Forecasted gross advances in the UK residential market by product lines under a pessimistic view, 2007-12f 18
Table 5: Forecasted gross advances in the UK residential market by product lines under an optimistic view, 2007-12f 19
Table 6: Two-year fixed rate products by top 10 mortgage lenders 28
Table 7: Likely movement in gross lending market share of top 10 mortgage lenders in 2008 30
Table 8: LTV at origination of all loans for house purchase in the UK, Q2 2005-Q4 2006 (%) 61
Table 9: Change and percentage change in the number of products available in the UK mortgage market, July-September 2007 64
Table 10: Amount held in ethical finance, 2006-07 69
Table 11: Selected green mortgage offers in the UK market 71
Table 12: International green mortgage offerings 73
Table 13: Largest reductions in mortgage product offering by lender, June 2007-08 82
Table 14: Lenders closed to new business, by number of mortgage deals offered in June 2007 83
Table 15: Comparison of top 10 lenders maximum LTV ratios, June 2007-08 86
Table 16: Top five cheapest and top five most expensive SVR mortgage offers, June 2008 87
Table 17: Comparison of top 10 lenders fixed and standard variable rate mortgage offers, June 2008 88
Table 18: UK monthly gross mortgage advances, 2006-07, January-June, (£m) 93
Table 19: UK monthly gross mortgage advances, 2006-07, July-December, (£m) 93
Table 20: Gross mortgage lending by product line, 2003-07 94
Table 21: Nationwides and Halifaxs house price indices, May 2007-May 2008 94
Table 22: Household debt to income ratio, 1998-2007 95
Table 23: Arrears and repossession data, 2003-07 95
Table 24: Value of all secured loans approved in the UK by product line, April 2006-April 2008 (£m) 96
Table 25: Top 10 mortgage lender by gross advances, 2006-07 97
Table 26: Top 10 UK mortgage lenders by gross advances, 2001-07 98
Table 27: Top 12 UK mortgage lenders by balances outstanding, 2001-07 99
Table 28: List of mortgage lenders in the UK market, May 2008 (Table 1 of 2) 100
Table 29: List of mortgage lenders in the UK market, May 2008 (Table 2 of 2) 101
Table 30: Major UK banks wholesale funding as a proportion of total funding (%) 102
Table 31: UK major banks issuance of RMBS (£bn) 102
Table 32: Northern Rock balance sheet growth and liability structure (£bn) 103
Table 33: Major UK banks customer funding gap (£bn) 104
Table 34: Which of these types of organizations, if any, would you consider/never consider when taking out a mortgage with? 105
Table 35: Responses for Northern Rock to the question which four or five of these companies would you consider taking a mortgage with? 105
Table 36: When taking out a mortgage, which of these methods, if any, would you use to find information about this product? 106
Table 37: UK properties in arrears and taken into possession, H1 1995-H1 2007 (units) 107
Table 38: The number of prime residential mortgage offers, June 2007-June 2008 108
Table 39: Number of sub-prime mortgages and sub-prime lenders, June 2007-08 108
Table 40: The number of 95% LTV mortgages and the number of 100% and 100%+ LTV mortgages, June 2007-June 2008 108
Table 41: Average maximum borrowing, June 2007-June 2008 109
Table 42: Number of first time buyer and remortgage offers, June 2007-June 2008 109
List of Figures
Figure 1: UK gross mortgage lending in the first six months of 2007 outperformed 2006 levels 6
Figure 2: Gross lending in November and December 2007 failed to reach 2006 levels 7
Figure 3: Gross lending for other was the fastest growing product line over the last five years 9
Figure 4: House prices have been falling in recent months 11
Figure 5: Household debt to income ratio has increased steadily over the last 10 years 13
Figure 6: The number of properties taken into possession increased further in 2007 14
Figure 7: Loan approvals for house purchase have dropped considerably 15
Figure 8: Under Datamonitors view, gross lending will drop by 19.3% in 2008 to reach £293.5 billion 16
Figure 9: Under a pessimistic view, the UK mortgage market will contract significantly over 2008-10f 17
Figure 10: Under an optimistic view, gross lending in the UK mortgage market will decline by 9% in 2008 19
Figure 11: Nationwide grew its mortgage business by a significant 37.9% over the 2006-07 period 21
Figure 12: HBOS has been losing mortgage market share over the years 22
Figure 13: All top 10 lenders increased their mortgage balances over 2007 but some lost market share 23
Figure 14: 48% of UK mortgage lenders are building societies 25
Figure 15: Average interest rate on fixed rate mortgages has continued to increase despite recent cuts in the base rate 27
Figure 16: UK banks have turned increasingly towards wholesale mortgage funding in recent years, 2000-07 33
Figure 17: The UK market for residential mortgage-backed securities has grown substantially in recent years, 1999-2006 35
Figure 18: Northern Rock has been increasingly dependent upon wholesale funding, particularly securitization, June 1998-June 2007 37
Figure 19: Major UK banks and others would face a significant funding shortage were they unable to access funding through securitization and the wholesale markets, 1997-H1 2007 41
Figure 20: More than 10% of respondents stated that they might either take out a mortgage or top up or change their existing mortgage in the next five years 44
Figure 21: Participants in higher household income groups are more likely to take out/top up/change mortgage product in the next five years 45
Figure 22: Banks and building societies are most likely to be considered by consumers when choosing a mortgage than other types of organization 46
Figure 23: Consumers are most likely to consider major mortgage players such as HBOS and Abbey when taking out a new mortgage 47
Figure 24: Northern Rocks popularity among the survey participants fell dramatically after September 2007 49
Figure 25: Face-to-face and the internet are the two most popular methods for seeking information on a mortgage product 50
Figure 26: While 52% of participants would speak to someone face-to-face when taking out a mortgage to find information about the product, 36% will opt for the internet 51
Figure 27: IFAs are more likely to be the point of contact for consumers when seeking out information about their mortgage 52
Figure 28: Face-to-face remains the preferred method by consumers for arranging a mortgage 53
Figure 29: The majority of consumers would never consider digital TV when arranging a mortgage 54
Figure 30: Arrears and repossessions are on the increase in the UK, H1 1994-H1 2007 58
Figure 31: Fund investments are the simplest and most valuable area for financial services companies to launch green propositions 75
Figure 32: Prime residential mortgage deals have decreased significantly since June 2007 81
Figure 33: The number of sub-prime mortgages has halved in one year 84
Figure 34: Mortgages with 100%+ LTV ratios have all but disappeared from the market 85
Figure 35: Average maximum borrowing decreased by £200,000 in H2 2007 89
Figure 36: Mortgage offers for first-time buyers and remortgagers fell sharply in Q2 2008 91
- HBOS
- HSBC
- Abbey
- Nationwide
- Northern Rock
- Lloyds TSB
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